Wednesday, 27 March 2013

Pakistan's Pipeline Options: Turkmenistan Versus Iran

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by Naveed Ahmad (03/20/2013 issue of the CACi Analyst)

Facing depleting petro-chemical reserves and soaring demands for energy, Pakistan has tough choices to make. It can either risk punitive action by opting for a steady supply of Iranian gas or rely on the more vulnerable but U.S.-backed 1,700 kilometer Turkmenistan-Afghanistan-Pakistan pipeline. Political instability and a lack of a long-term vision over the past two decades have impeded the evolution of both pipeline options, as well as inland and offshore exploration. With a modest forecast of an economic growth rate of 5.5 percent, Pakistan’s energy demand in 2030 may soar to 361.31 Million Tons of Oil Equivalent (MTOE), causing a deficit of 141 MTOE. Hence, Pakistan is increasingly facing an energy emergency.

 

BACKGROUND: Foreseeing energy shortages, Pakistan had three pipeline options under consideration in the early 1990s, respectively securing supplies from Iran, Turkmenistan and Qatar. Iran and Turkmenistan had in principle agreed to allocating gas fields as well as constructing the pipelines. The undersea natural gas pipeline from Qatar was problematic since it had to cross either Iran’s territorial waters or its coastline. Progress towards agreements on the Iran and Turkmenistan pipelines were slow to materialize, owing to political instability in Pakistan and successive changes of governments.

In response to a growing number of power shortages, the then prime minister Benazir Bhutto attracted heavy investment by allowing independent power producers to engage in fuel-based electricity generation, thus adding an additional burden to the country’s petroleum import bill. However, Tehran responded to Islamabad’s request and offered to dedicate the South Pars gas field to supplying its eastern neighbor. However, the talks never reached a conclusive stage due to abrupt changes of governments in Pakistan. By September 1999, Islamabad and Tehran had agreed on the crucial issue of pricing, pending the signing of documents at the summit level. On October 11, 1999, General Pervez Musharraf’s bloodless coup fatally interrupted the process.

Policy-makers in Islamabad then became preoccupied with the post-9/11 fallout, including the UN-authorized attack on Afghanistan. Meanwhile, the surge of tensions between Iran and the U.S. forced Pakistan to abandon the Iran option. In 2005, Washington started promoting the Trans-Afghanistan Pipeline, originally conceived and agreed upon in April 1995. The U.S. added India to the equation as well, terming the project the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, one strategic advantage of which was to divert Pakistan’s attention from the Iranian option while simultaneously establishing interdependency between the two nuclear-armed rivals. In spite of his exclusive hold on power, President General Musharraf failed to address the country’s energy security woes aggressively.

2008 marked the start of an industrial and logistical nightmare for Pakistan, including prolonged power outages and an increase in petroleum prices triggering inflation. Meanwhile, Afghanistan remained highly volatile, particularly in its central and eastern regions from where TAPI would have passed. Understanding the western neighbor’s internal dynamics of Islamist opposition to the U.S. and its allied Karzai government, Pakistan had already responded affirmatively to the Iranian pipeline plan, which also attracted Indian interest. Though India had success in parleys with both Pakistan and Iran, it bowed out under U.S. and western pressure in 2009.

Pakistan wasted crucial time on negotiations after India wanted to buy Iranian gas through the pipeline and eventually abandoned the project. President Asif Ali Zardari and his Iranian counterpart Mahmoud Ahmadinejad inaugurated the Pakistan part of pipeline earlier in March, 19 years after it was first discussed bilaterally. Faced with the increased burden of petroleum- and banking-specific global sanctions, Iran desperately needs to materialize this pipeline project with Pakistan.

IMPLICATIONS: Yet, the pipeline will not come close to meeting Pakistan’s energy needs, and only a miraculous gas discovery can quench its daily thirst for 2.5 billion cubic feet of gas per day. Pakistan could potentially face an annual economic growth of 7 percent, owing to its population, geography and resources. Failure to ensure employment opportunities may cause civil unrest and massive migration to more prosperous parts of the world. According to UNDP figures, 63 percent of today’s 188 million Pakistanis are below the age of 25.

The TAPI gas pipeline project looks great on paper, promising to deliver some 90 million metric cubic meters per day (mmcmd) of gas from Turkmenistan to South Asia. Yet, it requires a 650 kilometer-long pipeline passing through Herat, Helmand and Kandahar in Afghanistan. While the security situation remains problematic despite the NATO presence, the post-2014 scenario seems even worse for the investors as well as the respective government parties to this mega-project.

Even if the involved parties and investors decide to take the risk, gas deliveries from the Yolatan/Osman and adjacent gas fields in Turkmenistan to Afghanistan, Pakistan and India may not begin until mid-2018. Yet, financial and technical difficulties are only part of the challenge for the project that former U.S. Secretary of State Hillary Clinton termed a “New Silk Road for Central Asia.” With heightened tensions between U.S. and Iran, subversion activities are likely in Shiite regions like Herat from elements other than Taliban or al-Qaeda.

An uninterrupted flow of gas to Pakistan and India is only possible after the success of political negotiations between the U.S. and the Taliban, which have hardly begun. TAPI can create jobs in the country besides adding vital transit revenues of over US$ 300 million a year to the national exchequer.

Though Pakistan is going ahead with the US$ 1.3 billion gas pipeline, originating in Iran’s South Pars field, it is far from clear that the project will finally be implemented. Pakistan is making a long term commitment to gas supply from its south-western neighbor in the absence of a third party ratification of the source. Since Russia’s Gazprom backed out of constructing the pipeline and the Industrial & Chinese Commercial Bank walked out of funding the project, neither cash-starved Iran nor IMF-dependent Pakistan can accomplish it alone.

Moreover, the State Department can apply the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, against Pakistan for investing in Tehran’s energy sector. The law clearly stipulates the imposition of sanctions “if a person has, with actual knowledge, made an investment of US$ 20 million or more that directly and significantly contributed to Iran’s ability to develop its petroleum resources.” Additional sanctions, under the same act, prohibit specified foreign exchange, banking, and property transactions. Meanwhile, the National Bank of Pakistan has informed the finance ministry that its offshore branch will be closed if Iran-related curbs are slapped on the entity.

The question arises as to whether Pakistan will reinforce its partnership with Iran, risking the imposition of sanctions as part of the U.S. campaign to coerce Iran to abandon its nuclear program. Can Pakistan, which in the 1990s was under severe sanctions, pay such a high price for Iranian gas? Tehran will not be able to assist Islamabad on the fiscal front as the country has itself defaulted on payments for wheat imports from Ukraine and rice shipments from India.

CONCLUSIONS: Given crucial developments in Afghanistan in the wake of the 2014 pullout deadline and the importance of Pakistan’s role, the U.S. may decide not to impose sanctions in a quid pro quo. While TAPI cannot be materialized in near future, U.S. energy firms have been working to facilitate an LNG deal with Qatar to reduce the demand for Iranian gas. However, the Qatari option is not popular with the Pakistani media and suspicions of graft persist. A future government can clear this obstacle by ensuring more transparency and making it less costly for the common consumer. Like the U.S., Saudi Arabia has been weary of Pakistan’s strengthening energy ties with Iran. The hastily arranged March 11 ground-breaking ceremony of the pipeline was not well received among other political parties in the country for fear of reprisals by the U.S. and Europe.

Neither of Pakistan’s pipeline options for energy security may become reality in the absence of peace in Afghanistan or undoing of sanctions against Iran. Until then, Islamabad would either have to invest more in inland petroleum exploration or opt for the option of Qatari LNG.

AUTHOR’S BIO: Naveed Ahmad is an investigative journalist and academic, focusing on security, diplomacy and governance. He is founder of the ‘Afghanistan 2014’ project. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. ; and Twitter @naveed360.


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